Ease of Doing Business in Local Government: Push and Pull Factors for Business Investment in Selected South African Municipalities

One of the earliest conceptual works on the subject of ease of doing business was by North and Thomas (1973), who argued that barriers to entry faced by businesses hindered economic development. Building on these conceptions, the empirical work of scholars such as Canare [ 3 ], Fonseca et al. [ 4 ], and Klapper et al. [ 5 ] confirms that a higher cost of starting a business discourages potential entrepreneurs from establishing companies.

The World Bank created the Ease of Doing Business Index, which is a collective assessment of different parameters influencing the ease of doing business in a country. Although this index was discontinued as of 16 September 2021, these indicators assist in gauging the performance of municipalities related to ease of doing business issues, such as the issuing of permits, connecting to electricity, registering business property, protecting investors and enforcing contracts, paying taxes, trading across borders, resolving insolvency, and hiring and firing employees [ 6 ] (p. 4).

The economic growth potential of a country is directly related to good governance [ 7 9 ]. Job creation, labor productivity, balancing energy and materials consumption, technological innovation, increasing exports of goods and services, and actions for attracting investment all fall within the ambits of government. Aghion [ 10 ] explained how the governance environment is an important indicator of assessing the ease of doing business. Governments, as governing institutions, determine the conduciveness of the business environment by statutory and regulatory frameworks and general political stability. This is confirmed by the European Commission’s Ease of Doing Business report (2017) and studies that were conducted by the European Union during 2021 in countries such as Austria, Belgium, and the Netherlands. Governments are also responsible for operational aspects such as the issuing of business permits, transparent tender processes, access to electricity, adequate transport infrastructure, and the health and safety of customers. The conduciveness of the business environment ultimately determines the investment attractiveness and the overall ease of doing business in a particular municipal area.

2.1. The Role of Municipalities in Business Investment

The role of municipalities in business investment and economic growth is globally recognized. Goal eleven of the Sustainable Development Goals (SDGs), for example, aims to make “cities and human settlements inclusive, safe, resilient and sustainable”. The United Nations Secretary General has stressed the importance of local government by stating that the operationalization of the SDGs will mainly “take place at the sub-national level”. With 65 percent of the indicators relevant to local authorities, the effective implementation of Agenda 2030 and the SDGs depends on the involvement of various stakeholders, inclusive of business, at the local level. Additionally, the African Union’s Agenda 2063 recognizes that: “Cities and other settlements are hubs of cultural and economic activities, with modernized infrastructure, and people have access to affordable and decent housing including housing finance together with all the basic necessities of life such as, water, sanitation, energy, public transport and ICT” [ 11 ] (p. 14). This recognition is furthermore embedded in South Africa’s National Development Plan that aims “to rethink the urban to face the future challenges” and to “grapple with this task and deal intelligently with social exclusion, environmental threats, economic inefficiencies, logistical bottlenecks, urban insecurity, decaying infrastructure and the impacts of new technologies” [ 12 ] (p. 284). According to Van der Waldt [ 2 ], the realization of this aim is centered on the adoption of local economic development (LED) strategies during the early 1990s in the country. LED offers municipalities and local businesses the opportunity to work together to grow the local economy. It focuses on enhancing competitiveness, increasing sustainable growth, and ensuring that growth is inclusive.

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Municipalities’ role in the ease of doing business mainly centers around promoting local investment by establishing a conducive business environment [ 13 15 ]. Given this reality, many countries undertook administrative reforms that were targeted at streamlining and lowering the cost of doing and starting a business. These reforms eradicated entry barriers such as lengthy procedures to register businesses [ 3 ]. Administrative reforms usually also recognize the link between national and local government. This link is accentuated by the fact that credit rating agencies factor in the risk factors in local government when assessing national sovereign risk [ 16 ]. Foreign business investors also usually consider local conditions, inclusive of the municipal infrastructure that is required for production and manufacturing, business support structures, and political stability [ 17 ]. In addition, private sector investment benefits from clear and coherent rules—that is, rules that set out and clarify property rights and facilitate the resolution of disputes. These rules enhance the predictability of economic interactions and provide contractual partners with essential protections against arbitrariness and abuse [ 18 ]. Private sector investors (both local and international), therefore, require legal certainty or legal recourse should a breach of contractual terms occur. The impartiality of the justice system, free from political and big business interference, empowers investors to seek remedial action in courts should a contractual dispute arise [ 19 ] (p. 332). In addition, political commitment and continued government support play an important role in entrenching and empowering the regulatory institutions that were created to promote private sector investment. The regulatory environment and the institutions that were created to enforce regulations should be transparent and accountable, and should monitor the conduct of all role-players, including government [ 19 ]. This introduces predictability in business processes, which is vital in providing a stable contractual environment. The private sector especially requires guaranteed protection of property rights to safeguard its investments [ 20 ]. In this regard, Cliffe [ 21 ] argued that land reform processes in South Africa should be accelerated to reduce economic uncertainty. Land reform in the local sphere is largely regulated by the Draft National Spatial Development Framework [ 22 ], which provides an overall picture of the economic development opportunities with the greatest potential in the country from a spatial perspective. This includes the identification of growth nodes, since the relationship between economic growth and the financial viability of municipalities is significant. Growth in the local economy that is served by the municipality impacts on the municipality’s finances in numerous ways. Local government administrators should note that growth and investment improve household incomes, which means that households are better able to pay for the services that are provided by the municipality. Growth and investment also increase the value of property in the municipal area, which allows the municipality to increase revenue from property rates. The demand for services by businesses and higher-income residential consumers increases, and as these consumers are able to pay at levels above the cost of the service, the revenue that is raised through tariffs for these services increases and gives the municipality a greater opportunity to cross-subsidize low-income residential consumers.

In South Africa, municipalities are legally required to undertake developmentally oriented planning. The Integrated Development Plan (IDP) of a municipality can be regarded as an overarching strategic development plan for a five-year period. The plan must address issues such as municipal budgets, land (spatial) management, the promotion of local economic and business development, and institutional transformation in a consultative and systematic manner. Annual performance reports of municipalities need to provide progress details to municipal stakeholders (e.g., councilors, residents, oversight committees, and local businesses) regarding achieving service delivery targets. In terms of the stipulations of the Local Government: Municipal Systems Act 32 of 2000, the Local Government: Municipal Financial Management Act 56 of 2003, and relevant National Treasury regulations, municipal annual reports must contain both financial and nonfinancial performances for each financial year, outlining the activities that are performed by the municipality. The range of activities that are carried out in a municipality generally has broad economic implications. Activities include the building of infrastructure by way of housing, facilities, and roads; the sale and provision of services such as water, electricity, and refuse removal; property management in the leasing of land and buildings; the provision of services in land use management; and the zoning and rezoning of land. The IDP must also outline strategies to attract investment and retain and support existing local businesses. This obligation is mandated by the Constitution of the Republic of South Africa, 1996, which stipulates that municipalities must structure and manage their administration, budgeting, and planning processes to give priority to the basic needs of the community, and to promote the social and economic development of the community. Section 155(6)(a) and (7) of the Constitution sets out specific functions that play a significant role in businesses deciding which municipality to invest in, including the following:

• Building regulations;

• Electricity and gas reticulation;

• Potable water and sanitation services;

• Stormwater management systems in built-up areas;

• Municipal planning;

• Municipal public transport;

• Trading regulations.

The business implications of these municipal functions are confirmed by the World Bank [ 23 ] in its benchmarking of sub-national governments’ doing business reports. These reports focus on four dimensions that are related to municipal activities, namely:

• Dealing with construction permits: The South African performance is better than the average for OECD high-income economies. However, it is 40 percent more expensive than in developing countries [ 23 ] (p. 28);

• Getting electricity: Connecting a business to the grid in South Africa is relatively simple, but it takes, on average, 114.2 days and costs 391.5% of the income per capita, making this step longer and costlier than in comparable economies [ 23 ] (p. 42). In addition, unreliable electricity supply is one of several domestic factors contributing to the economy’s poor growth in recent years;

• Registering property: South Africa has a detailed sequence of procedures that are necessary for a business to formally transfer property titles. The associated time and costs in determining the ease of property registration are significantly lower than in comparable economies;

• Enforcing contracts: The strong and efficient South African judiciary plays a central role in supporting the private sector investments that are necessary for job creation. Good contract enforcement stimulates companies to invest and establish new business relations. Conversely, poor judicial performance and lengthy trials impose heavy costs on firms, undermine commercial trust, and diminish the public’s confidence in the justice system [ 23 ] (p. 69).

The financial viability of municipalities and the way in which funding and spending priorities are administered are critical for investment decisions by the corporate sector. In addition, such investment decisions impact on economic growth in the municipal area which, in turn, affects the revenue base of the municipality. A lower revenue base affects a municipality’s ability to serve the corporate community by means of quality services and infrastructure. In this regard, the financial viability of a municipality and its spending priorities are important factors influencing locational decisions by potential investors.